The rapidly-evolving socio-economic environment and the changes in consumer needs have had a tremendous impact on the 'what-to-drink' process; on the other side, organic and inorganic growth opportunities in the core beverage category are shrinking, favoring the trend for crossover products. Rabobank analyses how this affects companies in the food, dairy, and pharmaceutical sectors.

Long years of product marketing created a blueprint for what motivates consumers to buy – flavour, positioning, brand, etc. For consumers, this meant trusted brands, with a go-to category for each occasion. For brand marketers, the well-defined category characteristics meant the process of bringing products to market was efficient, leaving companies to focus on brand- building. Crossover products, featuring characteristics from two or more categories, simply became a tactical response to market peculiarity.

However, the evolving consumer and regulatory environment is fundamentally altering the 'what-to-drink' decision. With evolving consumer needs and paths to purchase, compartmentalised categorisation, with products for specific occasions, is losing relevance. Over the next decade, this category blurring will permanently alter the beverage landscape, with companies straddling several categories and expanding the definition of beverages to include dairy, food, and pharmaceuticals (see table below).

Keeping a watchful eye: drivers behind the blurring lineA combination of a rapidly-growing economy, changing consumer trends, and evolving socio- economic, tech, and category factors is driving the blurring of category lines. These drivers will determine the potential for category blurring.

Macro factors are creating a wholesale change in consumer behaviour – a necessary condition for category blurring. It is, however, the factors within the beverage sector that will determine the need for, and possibilities of, category blurring. In other words, strong macro drivers are necessary, but not sufficient for category blurring.

Core category growth is a key factor in determining corporate strategy. A stagnant or declining category provides the push for exploring category blurring. That's why in developing markets, where we still see growth, there's generally a lower motivation for considering crossover products. Category consolidation can be another motivation. A highly-consolidated category means fewer inorganic growth opportunities and, therefore, a higher motivation to explore growth in another category. Finally, category disruption in the form of unexpected competition or regulation is a solid motivator for category blurring. For example, the trend of rising obesity has furthered the debate about the role of soft drinks in excess calorie consumption. Many countries have either implemented, or are considering, some form of sugar tax, which will directly impact consumption. Interestingly, while added sugar is seen as unhealthy, consumers have shown a remarkable preference for carbonation.

Soft-drink companies have responded by launching sparkling versions of juices, tea, and water, playing on the health benefits of fruit juice or the low-calorie aspect of water, while retaining the refreshment provided by carbonation – a good example of blurring category lines. This trend will become stronger, and we can expect more crossover products as companies coax consumers away from high-calorie beverages.

Similarly, negative attention means consumer perception and the regulatory attitude towards alcoholic drinks are changing. Millennials are seeking a long-term healthy lifestyle, and hence, they remain more receptive to low/no-alcohol products. This trend will incentivise brands and companies to blur category lines between soft drinks and alcoholic drinks. The success of Seedlip, a non-alcoholic distilled beverage, will drive other companies and nimble start-ups to create similar category-blurring products in other markets.

Brands and companies need to understand which trends are driving changes in consumer requirements – both in the wider socio-economic context and their own category.

The impact of blurring category lines on the beverage sectorThe evolving consumer profile is less influenced by compartmentalised category features, focusing instead on taste, need, and occasion. This will incentivise companies to launch more hybrid products. This is already visible to an extent in the beverage aisle, with sparkling juice, water, and iced-tea brands competing with carbonates. Going forward, alcoholic-drinks companies will enter the non-alcoholic category, while themselves getting disrupted by cold-brew coffee, cannabis drinks, and adult soft drinks.

In the future, dairy, food, and even pharmaceutical products will launch crossover products, competing on health or active lifestyle positioning. Crossover products – combining features of two or more categories – will continue to take a greater share of throat away from core beverage categories.

Crossover products will create unexpected competitionWith 'near beer' like Budweiser Prohibition Brew, brewers are competing with soft drink for share of throat from, say, abstainers. On the other hand, brewed low-alcohol kombucha and the niche cannabis drink segment could disrupt the alcohol industry – the contours of this are not fully clear. For more detail, read the RaboResearch report, Does Alcohol Have A Marijuana Problem?

Dairy-based drinks, such as smoothies (Innocent), yoghurt drinks (Chobani), and non-dairy-based alternative-protein drinks (KeVita sparkling probiotic) are the most direct threat to the soft-drink category. Plant-based protein drinks offer an exciting entry point for packaged-food companies to target the emerging snacking and health & wellness trend, and compete in the soft-drink category.

Blurring lines will also see pharmaceutical and consumer-health companies tapping into the beverage industry in search of new growth areas. For instance, By-Health, one of the largest dietary supplement companies in China, introduced F6 Supershot, a plant-based energy drink, earlier in the year. CR Sanjiu, a pharmaceutical company, launched a new beverage product, Sannuo Glucose, which is positioned between functional drinks and sports drinks.

Crossover products will grow at the expense of the core beverage categoryBeverage category leaders are explicit in their intention to expand outside their core category. For instance, AB InBev’s plan to grow the non-alcoholic, low-alcohol beverage (NALAB) segment will impact the CSD category. For reference, at current volumes, AB InBev's 20% target is approximately 10% of Coca-Cola’s 2017 volume across all soft-drink categories. Within the soft-drink category, Coca-Cola has invested in several dairy and alternative-milk platforms, and launched an alcoholic drink earlier this year. On the other hand, dairy and food companies continue to expand their product lines into the beverage sector. For example, the acquisition of WhiteWave, a non-dairy milk brand, opened another front for Danone to compete for beverage share of throat, along with its water business.

Corporate strategy in a time of blurring category linesBlurring category lines will both intensify competition within a category and create new competition. With rapidly-evolving consumer preferences, a robust new product pipeline is critical for ensuring market relevance and sustaining consumer interest. Cross-category acquisition by companies seeking access to an unfamiliar category or an emerging route-to-market will remain important.

Crossover product will drive product innovationCategory blurring is likely to become a mega-trend when it comes to health and wellness. This will have an enormous impact on future beverage category prospects and on the product mix. Companies seeking to drive sustainable growth and remain relevant in the future will need to include crossover products as a key focus in product innovation.

In an attempt to expedite this process, major beverage companies have established internal accelerator programmes, or partnered with an external agency to scout for new ideas and brands in the emerging consumer start-up space. Venturing & emerging brands (VEB), a unit of Coca-Cola, has adopted this route to incorporate brands like fairlife and VIO dairy beverages, and Zico coconut water.

Managing the evolving path to purchaseCategory blurring is symptomatic of a wider phenomenon which is impacting the entire 'go-to- market' process, from distribution to activation. For example, a coffee roaster planning a crossover product like cold-brew coffee to compete against energy drinks will require access to the soft- drink aisle. The recent JDE acquisition of DPSG underlines their intention to compete in the soft- drink category.

Furthermore, millennials are changing traditional consumption settings – frequenting a wider choice of on-premise venues and also hosting at home, driven by the growing food delivery ecosystem. Therefore, aside from product development, a brewer entering the NALAB category would need to adapt product activation in line with the evolving all-day dining and brunch option at traditional on-trade outlets like bars and pubs.

Expect more cross-category consolidationWith the opportunities for large-scale consolidation becoming scarcer, the search for growth will fuel the trend for cross-category consolidation. Earlier this year, JDE acquired Dr Pepper Snapple Group, consolidating its position across coffee and soft-drink categories. There is market speculation of AB InBev acquiring a soft-drink company at some point in future. For packaged food and dairy companies evaluating growth opportunities in the emerging crossover product space, acquisitions offer an established route to market.

Vertical integration could emerge as a trend, with brands acquiring niche retailers or emerging distribution channels to pre-empt competition and raise the market entry barrier. AB InBev’s acquisition of Master of Malt, an online whisky retailer, is a case in point.

Blurring category lines will produce the next generation of beverage companiesBeverages is no longer competing for consumer share of throat from brands in its own category. Bob Gamgort, CEO of Keurig, said on the Dr Pepper acquisition: “Our view of the industry through the lens of consumer needs, versus traditional manufacturer-defined segments, unlocks the opportunity to combine hot and cold beverages and create a platform to increase exposure to high-growth formats.”

As the 'what-to-drink' process evolves, players from the dairy, food, and even pharmaceutical space will claim share of throat from incumbent beverage companies. Blurring category lines will be a natural consequence of companies facing shared target consumers and a shared route to market.

Thus, the leading beverage companies in 2030 are less likely to be defined by category. Instead, consumption occasion and consumer needs will become the key differentiator, with portfolios straddling multiple existing and crossover product categories.